Question

XYZhas the following financial information:

		Current Year	Prior Year
# Units in Beginning Inventory		?	0
# Units Sold		570,000	580,000
# Units Manufactured (Actual)		610,000	590,000
# Units Manufactured (Budget)		640,000	600,000
Selling Price	(per unit)	10.00	9.90
Variable Manufacturing Costs	(per unit)	5.00	4.80
Variable Sales+Admin Costs	(per unit)	1.00	1.00
Fixed Manufacturing Costs (Budget and Actual)	(total)	1,600,000	1,560,000
Fixed sales+admin costs (actual)	(total)	360,000	350,000
Net income (Variable Costing)		322,000	468,000

Inventory is recorded at FIFO

Required:

1. Calculate the value of the Ending Inventory under Absorption Costing and Variable costing for the prior year and current year
2. Prepare an income statement under Absorption Costing for the current year
3. Reconcile the difference in Operating Income between Variable costing and Absorption Costing for the current year

Answer 1

Part a –

	Absorption Costing	Variable Costing
Value of Ending Inventory	Current Year	Prior Year	Current Year	Prior Year
Ending Inventory Units (Refer note 1)	50,000	10,000	50,000	10,000
Multiply by: Unit Product Cost (Refer note 2)	$7.50	$7.40	$5.00	$4.80
Value of Ending Inventory	$375,000	$74,000	$250,000	$48,000

Working Note 1 – Ending Inventory Units

	Current Year	Prior Year
Beginning Inventory	10,000	0
Plus: Units Manufactured (Actual)	610,000	590,000
Units Available for Sale	620,000	590,000
Less: Units Sold	570,000	580,000
Ending Inventory	50,000	10,000

Note 2 –

	Absorption Costing	Variable Costing
Unit Product Cost	Current Year	Prior Year	Current Year	Prior Year
Variable Manufacturing Costs	$5.00	$4.80	$5.00	$4.80
Plus: Allocated Fixed Manufacturing Cost Per Unit
Current Year ($1,600,000 / 640,000 Units)	$2.50		0
Prior Year ($1,560,000 / 600,000 Units)		$2.60		0
Unit Product Cost	$7.50	$7.40	$5.00	$4.80

Part b – Income Statement

Current Year Income Statement (Absorption Costing)
	$$	$$
Sales Revenue ($10 * 570,000)		$5,700,000
Less: Cost of Goods Sold
Cost of Beginning Inventory (Prior Period)	$74,000
Cost of goods manufactured and sold during current year (560,000 Units * $7.50)	$4,200,000
Total Cost of Goods Sold		$4,274,000
Gross Profit		$1,426,000
Selling and Administrative Expenses
Variable Selling + Admin Expenses ($1*570,000)	$570,000
Fixed Selling + Admin Expenses	$360,000
Total Selling and Administrative Expenses		$930,000
Net Income		$496,000

Note – Units Sold in this year includes Ending Inventory cost of prior year.

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